Sunday, October 13, 2013

Goldman Sachs strikes again

Call it the revenge of the gold bears. Jeffrey Currie, the Goldman Sachs chief
commodity analyst whose name inspires dread on all gold bugs who hear it, has
made yet another bearish prediction for the gold price.

Last week Mr. Currie stated that gold is a
“slam dunk” sell because of his expectation that the U.S. economy will extend
its recovery after Congress extends the debt ceiling. The price of gold, as if on cue, promptly
declined after Currie’s remarks were widely published and it appears that gold
is indeed poised for another leg down.

Goldman Sachs’ target for the gold price next
year was adjusted to $1,050/oz. “Once we get
past this stalemate in Washington, precious metals are a slam dunk sell at that
point,” Currie said. “You have to argue
that with significant recovery in the U.S., tapering of QE should put downward
pressure on gold prices.”

Currie and Ric Deverell, the
head of commodities research at Credit Suisse AG, both said on a panel at the
Commodities Week conference in London on Oct. 8 that selling gold is their top
recommendation for trading in raw materials in the next year. “The downside of driving the bus off the
cliff is so significant that we will come to a resolution,” Currie said.

Joining Goldman Sachs and
Credit Suisse in its bearish gold outlook for 2014 is Morgan Stanley, which
stated on Oct. 10 that it expects the yellow metal will extend its losses once
the Federal Reserve begins tapering its QE3 stimulus policy. “We recommend staying away from gold at this
point in the cycle,” said Morgan Stanley analyst Joel Crane as reported in
Bloomberg.

“Our forecast profile
heading into next year is relatively flat against our expectations of rising
real interest rates and the U.S. dollar,” Crane told Bloomberg. Morgan Stanley further predicted that gold
would average lower every year through 2018.

There are two ways of interpreting the
increase in bearish calls on gold by investment bank analysts. On the one hand, as we’ve seen on at least
two occasions this year, the banks can be wrong when too many of them pile on
the bearish bandwagon. This falls under
the contrarian principle of the crowd usually being wrong at major junctures
(and yes, that includes institutions at times).

We’ve also seen that the leading
institutional banks can be right in their gold forecasts when the metal is
highly vulnerable to political moves – especially when the technical trend is
down. This appears to be one of those
instances, and I’m not unconvinced that analysts like Currie and Deverell
purposely wait until these critical junctures arrive before grandstanding with
their bearish predictions. It’s
interesting that these analysts are nowhere to be seen when gold is in an
uptrend; it’s only when a downtrend has been firmly established and gold is at
or near a critical chart support (and in danger of breaking under it) that they
come out with their bearish proclamations.

Some would say this is a case of high-profile
agenda setting rather than accurate prognostication.Whatever the case, the analysts have the
trend on their side and traders should be wary about assuming these analysts
are wrong.The price of gold (basis
December futures) is still under its 15-day moving average (see above), which
tells us the dominant immediate-term trend is still down.Until this downtrend is decisively broken,
the sellers are assumed to be in control.